Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Baidu (NAS: BIDU) combines two of the hottest trends in the investing world: Internet services and China. As the leading Chinese Internet search engine, Baidu has staved off international competition to protect its dominance in the world's most populous nation. But even as it seeks to spread its reach beyond its home turf, new competitors are challenging Baidu's leadership. Can the search giant stay on top? Below, we'll take a look at how Baidu does on our 10-point scale.
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.
With those factors in mind, let's take a closer look at Baidu.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of five past years
Free cash flow growth > 0% in at least four of past five years
Beta < 0.9
Worst loss in past five years no greater than 20%
Normalized P/E < 18
Current yield > 2%
Five-year dividend growth > 10%
Streak of dividend increases >= 10 years
Payout ratio < 75%
3 out of 8
Source: S&P Capital IQ. NM = not meaningful due to negative earnings and lack of dividend. Total score = number of passes.
With three points, Baidu is a fairly typical high-growth, no-dividend stock that generally doesn't match up well with what conservative investors prefer to see. After years of gains, the stock has also fallen short lately, dropping about 15% over the past year.
Baidu is one of the biggest long-term success stories in the Chinese stock market. As Internet use in China has risen, Baidu's take of advertising revenue has grown. And even now, estimates put Internet penetration in China at less than half, giving Baidu hundreds of millions of potential new users to draw in over the long haul.
Baidu won't have a free pass at all those customers, though. Recently, Baidu has faced more domestic competition. Sohu.com's (NAS: SOHU) Sogou search engine has been growing faster than Baidu, but its share is low enough that Sohu isn't a huge threat. Qihoo 360 (NYS: QIHU) , on the other hand, has a strong presence with both a popular Internet browser and antivirus tools. With Qihoo having dismissed Google (NAS: GOOG) , which used to provide its search services, it will have more incentive to draw customers away from Baidu. Already, it may have had an impact, as Baidu's market share has moved down to the 75% to 80% range.
But Baidu is going beyond Internet search to attack the next frontier: mobile. Baidu recently launched its own mobile browser, and Apple (NAS: AAPL) said that it will include Baidu as a search option in Apple's mobile browser as well. Baidu's also reaching out internationally with forays to offer search in a dozen different foreign languages.
For retirees and other conservative investors, the lack of a dividend from Baidu is troubling. But the company is clearly still in growth mode, throwing free cash flow to the winds as it tries to expand and grab up share in a fast-growing market. For those who are willing to take risk and have a long time horizon, Baidu may be worth looking at as an aggressive part of your retirement portfolio.
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.
There's a whole lot more to Baidu than a single article can cover. Take a look at our brand-new premium report, which breaks down the dominant Chinese search provider's strengths and weaknesses in more detail to show you whether Baidu is a buy right now. Just click here to access it now.
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The article Will Baidu Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Baidu.com, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Sohu.com, Baidu.com, and Apple, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.